The India Model

Gurcharan Das

From Foreign Affairs, July/August 2006

Summary:  After being shackled by the government for decades, India's economy has become one of the world's strongest. The country's unique development model -- relying on domestic consumption and high-tech services -- has brought a quarter century of record growth despite an incompetent and heavy-handed state. But for that growth to continue, the state must start modernizing along with Indian society.

GURCHARAN DAS is former CEO of Procter & Gamble India and the author of India Unbound: The Social and Economic Revolution From Independence to the Global Information Age.

Singh's challenge is to get the majority of Indians united behind reform. One of the reasons that the pace of reform has been so slow is that none of India's leaders has ever bothered to explain to voters why reform is good and just how it will help the poor. (Chinese leaders do not face this problem, which is peculiar to democracies.) Not educating their constituents is the great failure of India's reformers. But it is not too late for Singh and the reformers in his administration -- most notably finance Minister Palaniappan Chidambaram and the head of the Planning Commission, Montek Singh Ahluwalia -- to start appearing on television to conduct lessons in basic economics. If the reformers could convert the media and some members of Parliament, the bureaucracy, and the judiciary to their cause, Indians would be less likely to fall hostage to the seductive rhetoric of the left. If they were to admit honestly that the ideas India followed from 1950 to 1990 were wrong, people would respect them. If they were to explain that India's past regulations suppressed the people and were among the causes of poverty, people would understand.

PEOPLE POWER

Shashi Kumar is 29 years old and comes from a tiny village in Bihar, India's most backward and feudal state. His grandfather was a low-caste sharecropper in good times and a day laborer in bad ones. His family was so poor that they did not eat some nights. But Kumar's father somehow managed to get a job in a transport company in Darbhanga, and his mother began to teach in a private school, where Kumar was educated at no cost under her watchful eye. Determined that her son should escape the indignities of Bihar, she tutored him at night, got him into a college, and, when he finished, gave him a railway ticket for New Delhi.

Kumar is now a junior executive in a call center in Gurgaon that serves customers in the United States. He lives in a nice flat, which he bought last year with a mortgage, drives an Indica car, and sends his daughter to a good private school. He is an average, affable young Indian, and like so many of his kind he has a sense of life's possibilities. Prior to 1991, the realization of these possibilities was open only to those with a government job. If you got an education and did not get into the government, you faced a nightmare that was called "educated unemployment." But now, Kumar says, anyone with an education, computer skills, and some English can make it.

India's greatness lies in its self-reliant and resilient people. They are able to pull themselves up and survive, even flourish, when the state fails to deliver. When teachers and doctors do not show up at government primary schools and health centers, Indians just open up cheap private schools and clinics in the slums and get on with it. Indian entrepreneurs claim that they are hardier because they have had to fight not only their competitors but also state inspectors. In short, India's society has triumphed over the state.

But in the long run, the state cannot merely withdraw. Markets do not work in a vacuum. They need a network of regulations and institutions; they need umpires to settle disputes. These institutions do not just spring up; they take time to develop. The Indian state's greatest achievements lie in the noneconomic sphere. The state has held the world's most diverse country together in relative peace for 57 years. It has started to put a modern institutional framework in place. It has held free and fair elections without interruption. Of its 3.5 million village legislators, 1.2 million are women. These are proud achievements for an often bungling state with disastrous implementation skills and a terrible record at day-to-day governance.

Moreover, some of the most important post-1991 reforms have been successful because of the regulatory institutions established by the state. Even though the reforms have been slow, imperfect, and incomplete, they have been consistent and in one direction. And it takes courage, frankly, to give up power, as the Indian state has done for the past 15 years. The stubborn persistence of democracy is itself one of the Indian state's proudest achievements. Time and again, Indian democracy has shown itself to be resilient and enduring -- giving a lie to the old prejudice that the poor are incapable of the kind of self-discipline and sobriety that make for effective self-government. To be sure, it is an infuriating democracy, plagued by poor governance and fragile institutions that have failed to deliver basic public goods. But India's economic success has been all the more remarkable for its issuing from such a democracy.

Still, the poor state of governance reminds Indians of how far they are from being a truly great nation. They will reach such greatness only when every Indian has access to a good school, a working health clinic, and clean drinking water. Fortunately, half of India's population is under 25 years old. Based on current growth trends, India should be able to absorb an increasing number of people into its labor force. And it will not have to worry about the problems of an aging population. This will translate into what economists call a "demographic dividend," which will help India reach a level of prosperity at which, for the first time in its history, a majority of its citizens will not have to worry about basic needs. Yet India cannot take its golden age of growth for granted. If it does not continue down its path of reform -- and start to work on bringing governance up to par with the private economy -- then a critical opportunity will have been lost.